Absorption costing is the conventional technique of ascertaining cost. It is the practice of charging or costs, both variable and fixed to operations, processes or products and it is also known as full costing technique. In other hand marginal costing is technique of presenting cost data wherein variable costs and fixed costs are shown separately for managerial decision making.
The following are differences between marginal costing and absorption costing:
- In marginal costing, there is a different treatment of fixed overhead. Fixed cost is considered as period cost and by profit/volume ratio (P/V ratio), profitability of different products is judged. On the other hand, in absorption costing system, the fixed cost is charged to cost of production. A reasonable share of fixed cost is to be borne by each product and thereby subjective apportionment of fixed overheads influence the profitability of product.
- In the marginal costing only variable cost is considered for the product costing and inventory valuation, whereas in the absorption costing both fixed cost and variable cost are considered for product costing and inventory valuation.
- In the marginal costing, the presentation of data is so oriented that the total contribution and contribution from each product gets highlighted. In absorption costing, the presentation of the cost data is on conventional pattern. after deducting fixed overhead, the net profit of each product is determined.
- In the marginal costing, fixed overhead expenditure variance is to be computed for variance reporting. There is no volume variance since fixed overhead are not absorbed. On the other hand under the absorption costing, in variance reporting, fixed overhead expenditure and volume variance can be computed. volume variances can also be sub classified into capacity, efficiency and calendar variances.
- In the marginal costing, classification of expenses is based on nature, that is fixed and variable whereas, in absorption costing, classification of expenses is based on function that is production, administration and selling and distribution.
- In marginal costing, the unit cost of production does not get affected by the difference in the magnitude of the opening stock and closing stock. Whereas, in the absorption costing, due to the impact of the related fixed overheads, the unit cost of production gets affected by the difference in the magnitude of opening stock and closing stock.